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Extras on Excise: Does Massachusetts’ Rejection of Inflation-Adjusted Gas Tax Have National Implications?

Yesterday Massachusetts voters repealed a 2013 law that
indexed the commonwealth’s gas tax to inflation each year. At a time when gas tax revenues have been
falling fast and policymakers are looking for ways to pay for sorely needed
transportation infrastructure projects, can we look to New England as a
bellwether for how gas tax debates might play out across the rest of the
country?

Compare Massachusetts and New Hampshire, each of which
enacted gas tax increases in the past two years.

In Massachusetts, the legislature overcame the governor’s
veto to pass a gas tax increase in 2013 and index future increases to inflation
on an annual basis. Supporters argued
that inflation indexing is necessary to keep up with transportation
infrastructure projects, which the gas tax historically has been levied to
support. But those against the bill
argued that inflation indexing was tantamount to “taxation without
representation” because the legislature didn’t have to vote on the increase
each year. The measure was so unpopular that it spawned a successful initiative
to repeal it.

Meanwhile, northern neighbor New Hampshire passed a flat gas
tax increase this spring that has generated some driver grumbles but not, so
far, a voter-led repeal effort. In a May
interview with Bloomberg BNA, the gas tax bill’s sponsor, State Sen. Jim Rausch
(R) said he wanted to index his state’s gas tax to inflation, but that probably
would have killed the bill. He said he
decided that capturing additional gas tax revenue by making it a one-time
increase was better than letting the measure die.

States have varying gas tax rate structures, which can be
boiled down to one of two general forms: a fixed-rate tax or a variable-rate
tax. Flat-rate gas taxes, like those in
now Massachusetts and New Hampshire, collect a certain number of cents per
gallon of gas purchased. Meanwhile,
variable-rate taxes are calculated one of several ways—based on the price of
gas (similar to a traditional sales tax), based on a broader measure of the
economy’s inflation, or based on a hybrid of both the price of gas and an
inflation measure, according to a May 2014 policy brief from the Institute on
Taxation and Economic Policy (ITEP).

Right now, the federal government and roughly two-thirds of
the states have flat gas tax structures.
The federal government has not increased the federal gas tax since 1993,
and this paired with more fuel-efficient vehicle use is part of why the federal
Highway Trust Fund, which disperses transportation infrastructure project
funds, has had brushes with insolvency in recent months.

So will states interested in increasing their gas taxes to
pay for transportation projects aim for flat-rate taxes, knowing that the
revenue will lose buying power each year that it is not inflation adjusted,
because they worry that voters won’t tolerate inflation-adjusted taxes? At least two states (Florida and Maryland)
use inflation as at least some part of their gas tax calculations, so measures
like these can survive in some states.

Alternatively, will states go for measures that give
transportation infrastructure funds a chance at some kind of parity with
project costs through some kind of variable-rate structure, and potentially pay
a political price?

Or will states just get out of the gas tax game, like
Oregon’s new program that taxes people based on the miles they drive on state
roads?

Continue the discussion on Bloomberg BNA’s State Tax Group
on LinkedIn: Is indexing a tax to inflation “taxation without representation?”

For more information about state tax issues, sign up for a
free trial of the Bloomberg BNA Premier State Tax Library.

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